German Bank Concerns Pressure Euro

The euro which had achieved four month highs against the US dollar fell on Wednesday due to several factors. Media reports that stated that Germany’s financial regulator had said that toxic debt held by German banks could explode “like a grenade” put further pressure on the euro. The euro to dollar exchange rate fell 0.2% to $1.3982 after hitting a high of $1.4051 on May 22nd.

Regulator Says German Banks “Are more than able” to Deal with Toxic Debt

Jochen Sanio, president of the German regulator BaFin said that German banks have 200 billion euros ($280 billion USD) of toxic debt and that write offs could be as high as 816 billion euros. Sanio also said that Germany is “more than able” to deal with the toxic debt. Many forex traders expect a further decline in the euro to dollar rate and believe recent gains are not sustainable. The 14-day Relative Strength Index which measures the euro to dollar exchange rate hit 71.12 on Tuesday, the highest since March 23rd.

Higher US Consumer Sentiment

Higher US consumer sentiment affected currency exchange rates. The Conference Board’s index of U.S. consumer sentiment rose in May to 54.9 the highest since April 2003. A report from the Richmond Federal Reserve Bank indicated that manufacturing activity in the Mid Atlantic region rose for the first time in a year.

US Housing Data Suggests Slowdown

The dollar gained after US housing data suggested a slowdown in US housing markets, rising inventory of unsold homes and falling prices. The data could prompt a return to risk aversion for investors. Omer Esiner of Travelex Global Business Payments stated, “This is a mixed bag of data, more likely the dollar will probably firm on the fact that inventories are rising and prices are falling.” Many investors remain skeptical of the ‘green shoots’ theory which suggests that economic recovery is taking place and this skepticism is affecting currency exchange rates. Robert Blake of State Street Global Markets said, “It’s going to be a long, slow recovery and we will have more bad news to come.”

For the remainder of the week currency markets are expected to follow the lead of global stock markets.